A Case Study on HST - Part I: Place of Supply Rules

10/03/2011

MNP-Body

On July 1, 2010 B.C. and Ontario harmonized their provincial sales taxes with the Goods and Services Tax (GST). B.C. has a harmonized sales tax (HST) of 12% now and Ontario has a HST of 13% on all goods and services that were previously subject to GST.

In addition to the introduction of HST in B.C. and Ontario, Canada Revenue Agency (CRA) introduced a number of other changes that affect taxpayers all across the country. One of the more significant changes was with regards to the Place of Supply Rules. The Place of Supply rules are necessary to determine the appropriate rate of tax to charge. Under the GST/HST system if you are registered for these taxes, it is the requirement of the person selling the good or supplying the service to charge the correct rate of tax. This is in contrast to the rules under most Provincial Sales Tax systems where the purchaser who buys goods from out of province, is required to self assess the PST owing.

The new Place of Supply Rules have an impact on all types of businesses and the rules vary depending on what is being supplied. To illustrate how the new place of supply rules work, we will apply them to a fictitious client and look at the issues and considerations that arise as they work within a new framework.

Our case study is going to focus on Game Company. It is owned and operated out of Red Deer. After developing a new board game, the company has started to sell it across Canada. Depending on how well the sales of the board game go, they may look at creating an online version of their product. Game Company has annual sales of approximately 2,000,000 CAD.

When Game Company comes into MNP, they ask what sales tax issues they are going to have now that they have sold their games to organizations in B.C., Alberta, Saskatchewan, Manitoba and Ontario.

Place of Supply Rules Affecting Tangible Property

The first item we address are their sales. The games are considered tangible property. The Place of Supply Rules for tangible property have not changed. The rate of tax that must be charged is based on where the games are delivered.

Next, Game Company informs us that they entered into a contract with a toy store that has locations in B.C. and Alberta . The mailing address for the toy store is in Calgary, Alberta. The terms of the contract call for Game Company to deliver 100 games to the location in Prince George, 100 games to the location in Nanaimo, 100 games to the location in Edmonton and 200 games to the location in Calgary. Game Company wants to issue one invoice to the Toy Store but aren’t sure what rate of tax they are required to charge.

In order to determine the correct rate of tax to be charged, we need to know where the goods were delivered. We also need to know where title to the goods was transferred such as - were the games Freight on Board (FOB), what the customer’s location was or FOB to the Game Company’s warehouse. Even though the customer has a head office in Calgary and Game Company is also located in Alberta, there is still a requirement for Game Company to charge 12% HST on the portion of the games that it delivered to B.C.

Would the answer still be the same if the Toy Store sent its delivery truck to Red Deer to pick up the complete order of Games? As with everything related to the GST/HST the facts are very important. Just changing how the delivery occurs in the scenario above will change the rate of tax that Game Company is required to charge.

Stay tuned for Part II, where we discuss the impact of GST/HST rates on supplies.